BRRD II - A capital view: M-MDA, creditor hierarchy and selling eligible liabilities to retail

On 13 October 2020, Austrian draft legislation implementing BRRD II was published. The draft proposed by the Austrian Ministry of Finance is still subject to review and potential changes under the usual legislative procedure.

M-MDA (Article 16a BRRD II)

Legal basis: Article 16a BRRD II is proposed to be implemented in the new § 28a of the Austrian Act on the Recovery and Resolution of Banks ("BaSAG").

Capital stack: In line with BRRD II, the combined buffer requirement must be met in addition to the relevant MREL requirement in order to avoid M-MDA implications.

Prohibition to pay out distributions: The resolution authority may prohibit distributions on CET1 and/or AT1 and/or certain variable remuneration payments in excess of the M-MDA. The discretionary nine months grace period will apply.

Entry-into-force: In line with the maximum implementation deadline provided under BRRD II, the provisions on M-MDA will be applicable as from 28 December 2020. Its quantitative implications will of course depend on the MREL requirement (and CBR) applicable to the relevant resolution entity.

Documentation: Austrian banks may wish to consider the new M-MDA requirement in any upcoming AT1 documentation and policies on variable remuneration in order to avoid any conflict between potential contractual payout obligations / expectations and the new statutory restrictions.

Creditor hierarchy (Article 48 (7) BRRD II)

Legal basis: Article 48 (7) BRRD II is proposed to be implemented in a new paragraph 3 of the existing § 90 Austrian Act on the Recovery and Resolution of Banks ("BaSAG").

Statutory ranking: Austrian draft legislation provides for a statutory ranking provision according to which claims resulting from own funds items (Eigenmittelposten) shall have a lower ranking in regular insolvency proceedings than claims not resulting from own funds items. Where an instrument is only partly recognized as an own funds item, the whole instrument shall be treated as a claim resulting from own funds items.

Ranking following full de-recognition: No specific statutory ranking appears to be assigned to (former) own funds items which have been de-recognized in full (e.g. after grandfathering). It appears that general contractual interpretation would have to be applied to the relevant terms and conditions in order to determine their precise status following full de-recognition.

Selling eligible liabilities to retail (Article 44a BRRD II)

Legal basis: Article 44a BRRD II is proposed to be implemented in the new § 86a of the Austrian Act on the Recovery and Resolution of Banks ("BaSAG").

Instruments covered: Austrian draft legislation is mirroring the scope of eligible liabilities as mentioned in Article 44a (1) BRRD II. The new restrictions will therefore essentially apply, so we expect, to eligible liabilities having non-preferred senior status.

Requirements/restrictions:

• MiFID II suitability test (irrespective of the investment service involved – all as further clarified by ESMA in its Q&A on MiFID II and MiFIR investor protection and intermediaries topics);
• where the financial instrument portfolio of the retail client concerned does not exceed EUR 500 000 at the moment of the relevant purchase, (i) the client's aggregate investment in the relevant class of instruments must not exceed 10% of the client's financial instruments portfolio, and (ii) the initial investment amount must be EUR 10 000 or more.

No use of optional rights: According to draft legislation as it stands it is not intended that Austria will make use of any of the options available under BRRD II to set more rigid or alternative standards: No express extension to own funds or other bail-inable liabilities, no increased minimum investment amount / minimum denomination (so as to derogate from the application of the requirements set out above), no application of the new requirements to liabilities issued before 28 December 2020.